How do changes in monetary policy affect real interest rates and subsequently capital flows in an economy experiencing high inflation?

Changes in monetary policy, like raising interest rates, can significantly affect real interest rates, especially in an economy facing high inflation. When a central bank increases interest rates, it usually makes borrowing more expensive, which can lead to a decrease in spending and investment. This can help reduce inflation over time because people and businesses may spend less money. For example, if someone wants to take out a loan for a new car, higher interest rates might make them decide to wait instead, leading to less overall demand in the economy. As a result, capital flows can also be influenced, as higher interest rates may attract foreign investment, bringing more money into the country, but they can also slow down local economic activity.